Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Tuesday markets: The major U.S. stock benchmarks were lower across the board Tuesday afternoon ahead of Wednesday’s pivot Federal Reserve decision on interest rates. The Dow Jones Industrial Average remains on pace for its ninth straight negative session, a sour feat last recorded in 1978. The Dow’s recent struggles are getting a lot of attention, but investors need to remember that the 30-stock gauge has some major limitations that skew its headline performance. Our colleague Yun Li explored them in a piece published earlier today on CNBC.com . It has a lot of good insight, but among the most vital takeaways is that the Dow is a price-weighted average, meaning companies with higher stock prices have a larger influence. In the S & P 500 and Nasdaq Composite , each stock is assigned a weighting based on its market valuation. This nugget in Li’s story drives the point home: “[The Dow’s] price-weighted nature means that it’s not capturing the massive gains from megacap stocks as well as the S & P 500 or the Nasdaq. Although Amazon , Microsoft and Apple are in the [average] and are all up at least by 9% this month, it’s not enough to pull the Dow out of the funk.” It’s not entirely sunshine and rainbows in the S & P 500. There’s been growing concern about breadth in the broad market index, with more stocks moving lower than advancing. That dynamic is likely behind the market ending Monday’s session even further into oversold territory, according to our trusted momentum indicator, the S & P 500 Short Range Oscillator . However, our discipline says to look to put money to work when the market is oversold, which is exactly what we did Tuesday afternoon , adding to our positions in Home Depot and BlackRock . Both stocks have seen weakness in recent days, but remain fundamentally attractive businesses. We trimmed our positions in Broadcom, which went parabolic on Friday post-earnings and Monday, too. Sellers like us pushed shares of the custom chipmaker down more than 6% on Tuesday. We also trimmed Advanced Micro Devices on Tuesday morning on fundamental concerns. Sweet as honey: Analysts at Jefferies upped their price target on Club holding Honeywell to $260 per share from $220, one day after news that executives are considering separating its highly attractive aerospace business amid pressure from activist investor Elliott Management. That implies about 10% upside from Monday’s close. The key here is that Jefferies’ new target is based on a sum-of-the-parts valuation of Honeywell’s wide-ranging businesses, with roughly $145 a share being assigned to the aerospace unit. These SOTP valuation exercises are especially helpful when dealing with companies actively considering steps to reshape themselves. For example, we conducted our own for Club holding DuPont earlier this year after its announcement that it was breaking itself up into three companies. But it’s important to understand there are limitations to SOTP valuations, most notably that they struggle to account for all the upside that can occur when a breakup happens and the more-focused companies are set free to operate on their own. We saw this with the immensely successful three-way General Electric spin-off, as well as with the United Technologies separation . In both instances, some analysts didn’t believe GE and United Technologies had upside to the SOTP when they announced their moves — a fact that Elliott highlighted when it disclosed its $5 billion stake in Honeywell last month. Elliott also mentioned the Ingersoll Rand split. “While analysts initially estimated an average of just 10–25% upside from separating these former conglomerates, the actual value creation achieved has been substantially greater – Ingersoll Rand generated $100 billion of value from announcement to today, United Technologies $140 billion and GE $150 billion,” Elliott wrote in its letter dated Nov. 12. “In each case, improved business performance drove both higher earnings and increased valuations, leading to a level of value creation far exceeding any forecasts at the time these portfolio changes were announced. We believe this same opportunity exists for Honeywell today.” Honeywell plans to provide investors with a detailed update on its strategic portfolio review when it reports fourth-quarter earnings. We hope to hear that aerospace will be set free. Up next: There are no major earnings after Tuesday’s closing bell. Before Wednesday’s opening bell, we’ll see earnings from cereal giant General Mills and electronics components maker Jabil . But the big market event is later in the afternoon: the Fed’s December policy meeting announcement. The market widely expects the Fed to lower interest rates by 25 basis points to the range of 4.25% to 4.5%. After that, it’s very much up for debate. There’s a thinking in the market that the Fed will give a so-called hawkish cut, meaning they’ll lower rates but signal fewer than-expected cuts in 2025. The updated “dot plot” graph within the Fed’s Summary of Economic Projections will indicate how the committee is thinking about next year. But, as always, we expect Chairman Jerome Powell will remain committed to data dependence. Powell’s press conference kicks off Wednesday afternoon at 2:30 p.m. ET, a half-hour after we get the rate decision. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street.
